Weekly Report

Most of you seem to be under the illusion that Market profile is an excellent day trading tool. It Is ! …but the point which gets buried often is that the very nature of interpreting market behavior through the profile theory, also known as order flow, makes it an even bigger candidate for interpreting large moves in any instrument ( swing trades ) in the bigger time frame.

First, the market is an auction process which moves up or down until buyer seller demand arrives at a defining point where is is equal or where we say equilibrium or balance has been reached. This is what we call the Point of Control or POC an excellent tool to interpret day trade movements.

Second, the market either moves sideways or vertically around this balance zone depending on whether the current buy/ sell demand is relatively in or out of balance.

For our swing trade requirements we also use the same method also called the Market profile 1-2-3 method.

The only difference is that we look for the action across different day profiles, not just one.

In step 1 we look for a directional move, typically out of a high volume area.

The yellow rectangle in the Nifty chart above is a good example of this.

Currently at 5914, we have reason to believe that step 1 may be over. A confirmation would be awaited in the action this coming week.

Now in step 2, we look for the directional move to get over. This can be located by the appearance of a ‘p’ shaped profile if the instrument is in an uptrend or a ‘b’ shaped profile if the instrument is in a downtrend. Ideally this should be followed by the formation of a bell shaped profile or balance being achieved in the next few sessions.

Step 2 is actually a process of the market going sideways or trading a ‘bracket’ as we call it in Profile.It’s one of the more difficult environments to trade.

In the Bank Nifty chart posted above, you have very good examples of step 2 in action.

The purpose of step 2 is to find the balance for the move which unfolded.

Once step 2 is formed and the balance noted, step 3 unfolds.The buyer seller relationships and shapes of profiles in the balancing method have enough cues in them for step 3 which again is a big directional move.

Step 3 is a large directional move out of the balance area of step 2. A completed step 2 will tell us to no longer look for a range trade but for a step 1 directional move instead.

Bottom Line :

There are important clues in terms of the steps of market activity and volume analysis to help us determine a buy and sell strategy for the next directional move of the market.

Order Flow represents a unique paradigm for understanding and anticipating market activity.The key is to stop trading in terms of price only and start organising trades according to market structure.Trade Market Time, not clock time. Buy the time in your trade, not price. !

I’ll leave you with this chart which we picked up as a trade on Friday :